The Financial Stability Board (FSB) has published for public consultation an initial integrated set of policy recommendations to strengthen oversight and regulation of the shadow banking system.

The “shadow banking system” can broadly be described as “credit intermediation involving entities and activities (fully or partially) outside the regular banking system” or non-bank credit intermediation in short.

The FSB has focused on five specific areas in which the FSB believes policies are needed to mitigate the potential systemic risks associated with shadow banking:

• To mitigate the spill-over effect between the regular banking system and the shadow banking system;
• To reduce the susceptibility of money market funds (MMFs) to “runs”;
• To assess and mitigate systemic risks posed by other shadow banking entities;
• To assess and align the incentives associated with securitisation; and
• To dampen risks and pro-cyclical incentives associated with secured financing contracts such as repos, and securities lending that may exacerbate funding strains in times of “runs”.

The consultative documents published today comprise:
• A report entitled An Integrated Overview of Policy Recommendations which sets out the FSB’s overall approach to shadow banking issues and provides an overview of its recommendations across the five specific areas;
• A report entitled Policy Framework for Strengthening Oversight and Regulation of Shadow Banking Entities which sets out a high-level policy framework to assess and mitigate bank-like systemic risks posed by shadow banking entities other than MMFs (other shadow banking entities); and
• A report entitled Policy Recommendations to Address Shadow Banking Risks in Securities Lending and Repos that sets out 13 recommendations to enhance transparency, strengthen regulation of securities financing transactions, and improve market structure.

The FSB will continue to review the progress of the workstreams and expects to publish final recommendations in September 2013. It will thereafter work on the procedures for the consistent implementation of the policy recommendations.

The FSB is also publishing its second annual Global Shadow Banking Monitoring Report. The 2012 Monitoring Report has broadened its coverage to include 25 jurisdictions (all 24 FSB member jurisdictions and Chile), compared with 11 jurisdictions in 2011, and includes analyses on interconnectedness between banks and non-bank financial entities as well as on a specific non-bank financial subsector, namely finance companies.

The report shows that non-bank financial intermediation grew rapidly before the crisis (in parallel with the regular banking system), from an estimated USD26trn in 2002 to USD62trn in 2007. It has continued to increase since, although at a slower pace, to USD67trn at end 2011.

There is considerable diversity in the relative size, composition and growth of the non- bank financial intermediaries across jurisdictions. For example, the size of the shadow banking system continues to be large relative to the regular banking system in the US and in a number of other jurisdictions. Seventeen jurisdictions out of 25 saw an increase in non- bank financial intermediaries since the crisis; half of these jurisdictions are emerging markets and developing economies undergoing financial deepening.

Data granularity is improving, with the share of unidentified non-bank financial intermediaries within overall non-bank intermediation falling from 36 per cent in 2010 to 18 per cent in 2011. However, further improvements are needed in jurisdictions that still lack granular data to adequately capture the magnitude and nature of risks in the shadow banking system.